Liquidity Risk Management Practices and Profitability of Banking Firms in Nigeria

Abstract

Objective: The objective of this research is to examine how liquidity risk management practices impact the profitability of Nigerian banking institutions. The study utilizes panel data from 1960 to 2021 for analysis. Methods: The study employed financial time series methodology and based on the results of the descriptive analysis and augmented Dickey-Fuller unit root tests for stationarity, the authors employ the Johansen co-integration test to establish the long-run effect of liquidity risk management practices alongside other control factors on profitability of banking firms in Nigeria. The study also examines the short-run relationship between liquidity risk management practices and profitability by estimating the ordinary least square. Results: Based on the result of the descriptive statistics, it is evident that there is a positive relationship between the variations in the mean of the net profit for each of the banks. This result indicates that most of the banks recorded a profit for the year under review. The econometric results show that the current ratio of the banks was within the range of 1.74 to 2.49 indicating that most of the banks under study are well within the desired range and not overstretched as they may not meet the demand of their depositors for withdrawals in the near future. The coefficient of cash ratio in the random effect model is statistically insignificant which indicate that its impact is negligible on the profit margin of the commercial banks. With an R-square value of 0.66, it can be concluded that 66% of the variation in the dependent variable is explained by the independent variables used in the model. The coefficients of the current ratio and cash ratio were statistically insignificant and negatively related to net profits of the banks, this result implies that current and cash ratios have a limited impact on net profits. Conclusion: In conclusion, most Nigerian commercial banks have adequate financial resources to meet their current liabilities this is because they are well capitalized.